Brazil is expected to announce a successful exchange of its $5.6bn of outstanding Brady C bonds, a deal that Brazil's Treasury and central bank have been looking forward to doing for the last decade.
The deal, led by Credit Suisse First Boston and JP Morgan, is expected to be at least $2bn to $3bn in size, leaving a small illiquid number of C bonds to be called either in October, next April or at both those times.
The new bond will extend principle amortisations of the old C bond out by a maximum of four years and will carry the same 8% coupon as the outstanding deals.
Bondholders were asked to bid to determine what the maturity extension of the new bond should be. Based on yesterday's (Thursday) C bond trading range of 101.00 to 101.56, fair value extension was around the four year mark, which would give the new bond an April 2018 maturity.
The C bond price has dropped from a high of 103.5 earlier in the week when the bond exchange was announced and dealers raced to cover shorts.
Some bankers questioned whether Brazil would get the four year maximum extension, considering investors had focused for most of the week on a three to three and a half year extension at the time when the C bonds were trading in the 102.00 to 102.25 range.
"Some thought four years was long, but my sense is that investors are more concerned about missing the exchange," said one analyst.
Bondholders have little to gain in holding the C bonds until they are called. "Getting called is worse than tendering in the exchange, because of the costs to re-enter the Brazilian market," said anotther analyst.
Brazil will achieve significant relief in its amortisation schedule by exchanging the bonds. The $5.6bn of C bonds amortise at a rate of $650m a year.
More important still is the political importance for Brazil of ridding itself of the Brady bond. C bonds, while they no longer act as the main pricing benchmark on the Brazilian dollar yield curve, are the most glaring reminder of Brazil's need in the 1990s to restructure its debt in a Brady bond programme.